Multifamily office CAZ Investments and a unit of Aberdeen Standard Investments have begun working together to buy stakes in private capital managers in the middle market.
CAZ expects to invest more than $250 million under a newly created long-term partnership with Bonaccord Capital Partners, the unit of Aberdeen that acquires minority equity stakes in private market managers, CAZ founder and chief investment officer Christopher Zook said Monday in a phone interview. He said they are considering alternative investment managers with strategies in private equity, private debt, and real estate, targeting firms with $1 billion to $10 billion of assets.
The move is a “critical step” in developing Aberdeen’s private markets business, according to Peter McKellar, the asset manger’s global head of private markets. “Sophisticated private markets investors like CAZ continue to develop away from passive LP investments and into pursuing deeper, holistic relationships with their” general partners, he said Monday in a joint statement with the Houston-based multifamily office.
Investment strategies targeting minority stakes in asset managers have growth substantially over the past five years “due in large part to the attractive financial characteristics of private markets GPs’ business model,” according to Bonaccord and CAZ. Private markets have been booming, with UBS Group’s chief investment officer Mark Haefele saying in a research note Monday that “the advantages of having private market exposure in a portfolio are increasing” at a time when gains from traditional assets are expected to be smaller than in the past decade.
Investors benefit from buying stakes in GPs — or the firms that raise funds to invest in private markets — because they share in the economics of the business while avoiding fees they’d otherwise be charged for exposure to their strategies. So-called limited partners, or LPs, pay up to participate in private capital funds in hopes of higher returns than in public markets.
“There are lots of benefits from being on the general partnership side of the table,” Zook said by phone. “We’re compensated for the management fees” while reaping gross returns from private equity firms’ deal making, he explained.
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Bonaccord targets the middle market partly because it has “far less competition,” according to the joint statement. Also, “the coronavirus pandemic has led many investors to look beyond traditional large-cap GP deals for more attractive fundamentals in the mid-sized space,” Bonaccord and CAZ said.
The partnership gives CAZ, which has been focused on stakes in larger private equity firms, exposure to mid-market GPs as well as co-investment opportunities, according to the statement. Zook said by phone that his multifamily office has purchased stakes in large GPs through its longtime partnership with Neuberger Berman Group’s Dyal Capital Partners.
“We will continue to be involved in the large-cap space,” he said, “but we also saw an opportunity developing in the middle market.”
Zook said that more than 40 percent of larger fund managers with more $8 billion of assets have sold stakes in their business, compared to less than 10 percent of mid-market firms.
Aberdeen’s private markets platform, which includes Bonaccord, manages $86 billion of assets globally, according to the statement. That includes $22 billion in mandates targeting investments in outside private capital firms, as well as co-investments in private equity, private credit, real estate, and real assets.
For example, in July, Spear Street Capital announced that Bonaccord had bought a minority stake in the office property owner. Terms of the deal were not disclosed.
CAZ participated in that deal, as well as others, with Bonaccord, according to Zook. He declined to name the other deals done with Bonaccord under their strategic partnership.